Over the next few months, the general
counsel’s office will continue to devote this space
to discussion about the new Oregon Rules of Professional
Conduct (the "Oregon RPCs"1). This month’s
topic is Rules 1.15-1 (Safeguarding Property) and 1.15-2
(IOLTA Accounts and Trust Account Overdraft Notification).
The IOLTA rule is one of the rules that is most changed,
in form if not substance, from its Code counterpart,
and many lawyers understandably have heightened concern
about compliance with it.

The most noticeable aspect of Rule 1.15
is its numbering. There is no ABA Model Rule equivalent
to our two-part rule. The original proposal for the
Oregon RPCs contained only a single Rule 1.15, which
contained 13 subparts to encompass the general obligations
regarding safeguarding client property and the IOLTA
and trust account overdraft notice rules.2 However,
with the amendments to the IOLTA rules proposed by
the Oregon Law Foundation, the rule became even longer
and more unwieldy. After some discussion, we opted
for a divided rule, leaving 1.15-1 to mirror the ABA
Model Rule on safeguarding client property, and putting
the IOLTA and trust account overdraft notice provisions
into a new and unique 1.15-2. We were committed to
keeping the Oregon RPC numbering consistent with the
ABA Model Rules and the only alternative was to create
a new Rule 1.19; that was rejected in favor of keeping
the rules on handling client property in close proximity.

Our view of the revised IOLTA rule is
that, despite the changes, it will be a seamless transition
for lawyers who understood and complied with the old
rule. The amendments to the rule were required by the
U.S. Supreme Court’s decision in Brown v. Legal
Foundation of Washington, 538 U.S. 216 (2003),
where the Court held that clients are entitled to the
net interest earned on their funds held in trust for
them. Only the interest from client funds that cannot
earn net interest may be paid over to an IOLTA program.
Net interest is interest earned net of the cost of
generating the interest.

The former DR 9-101(D) required
that client funds "for which it is not practical" to
earn and account for income on individual deposits
be maintained in a trust account from which the cumulative
interest, net of bank charges, was paid to the Oregon
Law Foundation. Under the Court’s holding in Brown, the
constitutionally appropriate test is not practicality,
but whether the client funds can or cannot earn net
interest for the client.

The fundamental change in the rule, of
course, is the concept of "net interest" and
how it shall be calculated. Rule 1.15-2(d) enumerates
the factors to consider:

The amount of the funds;

The amount of time the funds are expected to be
held, with due consideration of the likelihood of
delay;

The rates of interest at the financial institutions
where the funds will be held;

The cost of establishing and administering the
account, including bank service charges, the cost
of the lawyer or law firm’s services in maintaining
the account, the cost of preparing any tax-related
documents reporting or accounting for the income
accruing to the client and the ability of the financial
institution, lawyer or law firm to calculate and
pay net income to individual clients and

Any other circumstances that affect the ability
of the client’s funds to earn a net return for the
client.

As with DR 9-101(D), the new rule allows
a lawyer to use either separate interest-earning accounts
for each client or client matter, or a pooled account
for all clients whose funds can earn net interest.
If a pooled account is used, there must be appropriate
sub-accounting to compute the net interest earned by
each client’s funds.

Paragraph (e) of Rule 1.15-2 requires
lawyers to review their IOLTA account at "reasonable
intervals" to determine whether circumstances
have changed that require a different handling of client
funds. For instance, the resolution of the case may
take longer than originally anticipated, and the funds
may be held for a period during which the client’s
funds earned net interest. In such event, the lawyer
or law firm must transfer the funds from the IOLTA
account to an account where the interest will be earned
for the client. If any interest that has been earned
on the client’s funds has already been paid to the
OLF, the lawyer or firm must request a refund in the
manner described in paragraph (f) of Rule 1.15-2.

A lawyer trust account (IOLTA or other)
may be maintained only in a financial institution that
meets the requirements of Rule 1.15-2(h).3 In
addition to being authorized to do business in the
state where they are located and federally insured,
eligible institutions must also enter into an agreement
with the OLF to provide detailed reports of IOLTA account
earnings and remit those earnings to the OLF at least
quarterly. The financial institution must also be one
that agrees to report trust account overdrafts to the
bar.

Lawyers are responsible for making sure
that the financial institutions where they have trust
accounts meet the rule’s requirements. The bar has
a record of the institutions that have agreed to report
trust account overdrafts to the bar, and the OLF will
soon have a record of those that have agreed to comply
with the rule’s remittance and reporting requirements.
Trust accounts at a noncomplying institutions must
be moved to institutions that meet the rule’s requirements.

The remaining provisions of Rule 1.15-2
address the trust account overdraft notice program,
including the duty of a lawyer to provide a written
explanation to the bar’s disciplinary counsel of any
overdraft. These requirements are identical to what
was required by DR 9-102.

Rule 1.15-1 is nearly identical to the
provisions of former DR 9-101 regarding the
duty to safeguard and account for client property.
There are a few minor changes, however. For instance,
the new rule permits a lawyer or firm to maintain a
trust account in a state other than the state in which
the lawyer’s office is situated, with the consent of
the client or third person whose money is being held
in trust.

The requirement to hold in trust fees
and costs paid in advance until they are earned is
expressly stated in paragraph (c) of Rule 1.15-1. Under
Oregon case law, fees may be earned on receipt only
if the client agrees in writing. See Oregon Formal
Ethics Op. No. 1998-151 and authorities cited therein.

Rule 1.15-1 carries forward the lawyer’s
obligation to render a full accounting regarding the
lawyer’s receipt and disposition of client property.
Note, however, that Rule 1.15-1(d) requires such an
accounting only upon the client’s request, whereas
DR 9-101(C)(3) did not have that qualifier, arguably
requiring lawyers to "render appropriate accounts" even
if the client didn’t ask.

Rule 1.15-1(d) continues the requirement
that funds to which two or more people (one of whom
may be the lawyer) claim interests be held in trust
until the dispute is resolved. The portion of funds
not in dispute must, of course, be distributed promptly
to the person entitled to it.

Proper safeguarding of client property,
of which trust accounting is a major part, is an important
aspect of the fiduciary duties of lawyers to clients.
It is an obligation for which there is not much latitude
for errors. Lawyers who delegate their trust account
responsibilities to nonlawyer staff must use care in
selecting, training and supervising those individuals.
Oregon RPC 5.3 makes it clear that lawyers having direct
supervisory authority over nonlawayer employees or
assistants must make reasonable efforts to ensure that
the person’s conduct is compatible with the lawyer’s
ethical obligations. Moreover, the lawyer will be responsible
for conduct of the nonlawyer that would be a violation
of the rules by a lawyer if the lawyer orders or ratifies
the conduct, or knows of it and fails to take reasonable
remedial action when the consequences can be mitigated
or avoided. On the general topic of training subordinates,
see Hierschbiel, H., "Training Subordinates," OSB Bulletin,
November 2004.

Endnotes

1. Although somewhat cumbersome, this
designation will help avoid confusion with the Oregon
Rules of Civil Procedure (the ORCPs).

2. The ABA Model Rules have no counterpart
to our IOLTA and trust account overdraft notification
provisions; most states that have such programs created
them in free-standing court rules distinct from the
lawyer disciplinary rules.

3. Note, too, that Rule 1.15-1(a) requires
that lawyer trust accounts be in financial institutions
selected by the lawyer or law firm "in the exercise
of reasonable care."